Commodities Daily - July 31, 2020

> Oil volatility spikes amid weak US economic data and political uncertainty. After the 2Q20 GDP data from the eurozone today, oil investors will turn their focus toward US personal income and spending data for June, the July reading of the University of Michigan US consumer sentiment index and the weekly Baker Hughes rig count data. We note that the Baker Hughes active US oil rig count showed a rare uptick last week after weeks in freefall (around 500 active rigs have been taken offline since mid-March, leaving a total of just 180). A second straight increase could amplify fears of a rebound in US oil production, weighing on oil prices later in the day. We also think today's US economic data is more likely to provide a negative than a positive surprise. Given the overall backdrop, we think that the October Brent contract, which will become the front-month contract on Monday, is more likely than not to end the week below $43/bbl.> Gold prices up this morning after bout of profit taking yesterday. Yesterday, investors took advantage of weak 2Q20 data from the World Gold Council in order to take profit in gold, which ended up dropping 0.7% to finish the day at $1,957/oz. The dollar is weaker this morning ahead of what promises to be another day of tough talks between Democrats and Republicans in the US over the next stimulus package. Key data releases today include US personal income and expenditures and the Chicago PMI and University of Michigan consumer sentiment index for July.OIL VOLATILITY SPIKES AMID WEAK US ECONOMIC DATA AND POLITICAL UNCERTAINTYDuring the first half of the day yesterday, the current front-month Brent contract for September slid $1/bbl to the technical support level of $42.8/bbl that we mentioned in yesterday's daily report. After breaking this level, Brent plummeted to $41.4/bbl (abrupt price moves like this often follow a breach of key technical levels). Yesterday's key global data release was US 2Q20 GDP, which fell a devastating 33% Q-o-Q in annualized terms. However, the headline figure and a number of underlying data points were slightly better than expected. Another negative factor for risk sentiment yesterday was a tweet from US President Donald Trump that raised the possibility of delaying the nation's presidential election due to the spread of the coronavirus. Later in the day, however, strong results from the US's largest tech companies helped global sentiment to shift from outwardly negative to ambivalent, with a swift rebound in the S&P 500 helping Brent recover to above $43/bbl. The current front-month contract eventually settled at $42.94/bbl, fixing $0.81/bbl below the previous settlement. The October contract, which will become the new front-month one on Monday, yesterday settled at $43.25/bbl, implying contango at the front end of the Brent futures curve, which indicates that there is still some lingering concern about oversupply. We note that contango provides an incentive for traders to store crude in the hopes of selling it at a profit later, and that Royal Dutch Shell, Total, Eni and Norway's Equinor have all reported bumper 2Q20 trading profits over the past week thanks to the supercontango seen in 2Q20. We previously highlighted that the current contango resulted from a drop-off in oil demand from China, which seems to have taken a pause refilling storage, and because many now fear OPEC's m-o-m output hike in August was premature.This morning, China's official manufacturing PMI came in just above expectations at 51.1, providing mild support for oil prices, while the nonmanufacturing gauge was a smidge below consensus at 54.2. Meanwhile, reports of rising Covid-19 infection rates from a variety of APAC countries - among them Australia, China and South Korea - have been blamed by investors for the lack of bullish conviction today and in recent days. After the 2Q20 GDP data from the eurozone today, oil investors will turn their focus toward US personal income and spending data for June, the July reading of the University of Michigan US consumer sentiment index and the weekly Baker Hughes rig count data. We note that the Baker Hughes active US oil rig count showed a rare uptick last week after weeks in freefall (around 500 active rigs have been taken offline since mid-March, leaving a total of just 180). A second straight rise could amplify fears of a rebound in US oil production, weighing on oil prices later in the day. Meanwhile, we stick to our view that as long as WTI remains below $45/bbl, a robust rebound in the active US oil rig count and oil output is unlikely. Furthermore, we think today's US personal income and consumption data and consumer sentiment index are more likely to provide a negative than a positive surprise, though there is upside risk for the former given that the government's support has more than fully replaced the lost income in aggregate. Given the overall backdrop, we think that the October Brent contract, which will become the front-month contract on Monday, is more likely than not to end the week below $43/bbl. We also note that Japanese GDP and manufacturing PMIs for China, Russia and Japan are due early Monday LD PRICES UP THIS MORNING AFTER BOUT OF PROFIT TAKING YESTERDAYSentiment largely turned on data releases yesterday. Early in the day the World Gold Council issued a report showing a decrease of 11% in demand for physical gold in 2Q20. Meanwhile, the US reported a 32.9% annual drop in GDP for 2Q20 on a seasonally adjusted basis. The consensus had been for a 34.5% drop. This was the largest drop since the Great Depression. The Q-o-Q drop on a sequential, non-annualized basis, meanwhile, was 9.5% (seasonally adjusted). Gold prices initially did not react to the data but a little later it appears that some investors started to take profit after the strong rally over the last two weeks. As a result, gold prices slipped back to $1,939/oz. At the center of attention today will be continued negotiations in the US Congress over a new stimulus bill. The dollar has weakened this morning, which has supported gold back to $1,977/oz. We note that the Democrats are calling for $3.5 trln in additional stimulus, whereas the Republicans have put forth a more modest $1 trln plan. Today, meanwhile, the extra weekly unemployment benefits run out. Treasury Secretary Steven Mnuchin said that some progress has been made and that negotiations would continue over the weekend. Key data releases today include US personal income and expenditures and the Chicago PMI and University of Michigan consumer sentiment index for July. We expect gold prices to remain above technical support level of $1,961/oz amid renewed weakness in the